Subsidization Competition: Vitalizing the Neutral Internet

Unlike telephone operators, which pay termination fees to reach the users of another network, Internet content providers (CPs) do not pay the Internet service providers (ISPs) of users they reach. While the consequent cross subsidization to CPs has nurtured content innovations at the edge of the Internet, it reduces the investment incentives for the access ISPs to expand capacity. As potential charges for terminating CPs' traffic are criticized under the net neutrality debate, we propose to allow CPs to voluntarily subsidize the usage-based fees induced by their content traffic for end-users. We model the regulated subsidization competition among the CPs under a neutral network and show how deregulation of subsidization could increase an access ISP's utilization and revenue, strengthening its investment incentives. Our results suggest that subsidization competition will increase the competitiveness and welfare of the Internet content market. However, regulators might need to: 1) regulate access prices if the access ISP market is not competitive enough; and 2) regulate subsidies if network is highly congested. We envision that subsidization competition could become a viable net-neutral model for the future Internet.